3. Trulia, Inc. operates an online real estate site that provides clients with i

Question

3. Trulia, Inc. operates an online real estate site that provides clients with information about homes for sale, apartments for rent, neighborhood insights, and real estate markets and trends. Trulia stock is currently $27.50, up 15% from its initial public offering on September 20, 2012. Due to the rebounding housing market, you are positive about the prospects for Trulia stock. You have $110,000 to invest and are considering the following 3 investment strategies: i. Use your capital to purchase shares outright. ii. Use your capital plus borrow $55,000 from your broker to purchase shares. iii. Use your capital and borrow the maximum allowable amount (under Regulation T) from your broker to purchase shares. g. Prior to the financial crisis, we saw high and increasing leverage ratios of a number of financial institutions. For example, some estimates put Bear Stearns

Explanation / Answer

initial price of turulia's stock = 27.5/1.15 = $ 23.91

total amount = $110000

i.purchase shares outright.

ii.capital plus borrow $55,000 from your broker to purchase shares.

iii.capital and borrow the maximum allowable amount (under Regulation T) from your broker to purchase shares.

for part 1)

for part 1.

no of shares = 110000/27.5 = 4000

leverage = 0

for part 2

no of shares = 110000+55000)/27.5 = 6000

leverage = 1/2

for part 3

no of shares = 4000 + 2*4000 = 12000

leverage = 2/1

d)

% change = 2.75/27.5 *100 = 10%

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